Know Your Customer (“KYC”) has been a big inhibitor for banks in providing both supplier financing and commercial card solutions to companies they do not bank.

KYC has always been a must for banks, but the US Patriot Act made the due diligence of getting relevant customer information when on-boarding suppliers even more paramount. And in Europe, the Third Anti-Money Laundering Directive has been in effect since 2005.

Yet many corporate procurement, AP, and treasury practitioners have little clue what KYC procedures are at banks.

As more supplier finance programs look to drive participation rates (think General Mills or Coca Cola offering early pay opportunities to their entire supplier base), developing the most cost effective KYC program to onboard companies that are typically not bank customers is imperative. This is especially true as no government or industry body looks to put a KYC Utility together for corporates to be that one source for information. SWIFT is not close to a commercial solution.

It is no wonder supplier adoption of various early pay programs remains very low, with many vendors’ supplier acceptance rates below 5% and many banks with SCF programs only doing top tier suppliers due to the high costs of onboarding. I have had a number of conversations with companies around SCF programs with 10 or less suppliers after implementation.

We know developing KYC programs to meet various early pay programs is not a trivial problem.Individual countries’ interpretations of KYC and anti-money laundering (AML) laws vary widely across jurisdictions, even in the 28 member EU State. But that's just a start. There are 212 countries. In America alone, you have 50 states, plus Commonwealths, counties and cities. China operates company registrations per province.

In short, companies and banks need to understand each jurisdiction to determine what documents, what AML laws and what key principal documents are necessary to do AML.

Databases have been built to help with company Legal Identifier issues, but these still have a ways to go:

Across jurisdictions

Between parent / subsidiaries

Comparing registered address vs physical addresses

Comparing company DBA vs registered names

And of course dreaded "shelf" companies

Additional challenges compound bank compliance issues as well:

KYC varies by bank and even departments within the bank. Each bank and department may have different tests for KYC, personal investigations, data retrieval, and proving ID and verification.

A critical bottleneck in the supplier on-boarding area for SCF is searching for existing liens and if liens exist, getting lien waivers (this is a particular bottleneck In the North American on-boarding process).

Every funder has its own requirements. This makes it very complex for suppliers using multiple SCF or commercial card programs. For example, a supplier using Citibank and an HSBC program must go through KYC and AML assessments for each bank.

Ultimate beneficial ownership (UBO) rules take effect next year, and it will be crucial to verify the owners of a company and check on the directors and shareholders of a company.

Granted, there's (some) good news too. FinTech companies have leveraged technology to onboard more suppliers at faster rates than banks, and there are lessons we can all learn from their efforts, even if they do not face identical requirements. Still, there is much more we can learn. Under Global BusinessIntelligence, I am conducting research with banks to better understand aggressive versus standard KYC business practices and whether there tools out there to look at KYC in a different way.

We really need to make progress here if we are to ramp up supplier on-boarding. If you are interested in joining me in this investigation, please contact me at dgustin@globalbanking.com

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For almost 20 years, David has been running a global research and advisory practice centered on helping banks, vendors and corporations with trade services, trade credit and financial supply chain matters. His formal education includes an Information Systems and Economics degree from Carnegie-Mellon University, an MBA from Purdue, and a Chartered Financial Analyst designation.

The closest thing to a household name in procurement and supply chain, Jason has led the charge as an advocate, futurist and evangelist since the 1990s. Initially at FreeMarkets and then an adviser to Ariba and other firms, Jason branched out on his own to establish the Spend Matters brand (parent company: Azul Partners), which emerged to become the largest news and information portal covering the procurement and supply chain sector. Jason divides his time between research, speaking, corporate finance advisory and mentoring dozens of firms and procurement organizations in the industry.